Social media has very seldom been leveraged in Canadian proxy
contests. One reason for this may be the lack of knowledge about
its full potential.1 To address this reason, our
first post in this series reviewed social media's impact on
public discourse and proxy contests in the U.S. and Canada.

Another reason for the limited use of social media in Canadian
proxy contests is the lack of specific regulatory guidelines.
Unlike in the U.S.,2 in Canada there is no regulatory
guidance on the use of social media to communicate with
shareholders. This article reviews some legal considerations
applicable to the use of social media in Canadian proxy
contests.

Proxy Solicitation Rules (concern for board and activist)

It is critical to obtain legal advice prior to using social
media to communicate with shareholders, particularly in the midst
of a proxy contest. Any shareholder or the board3 may
announce its position on social media regarding corporate
governance issues, management, the company's operations, or an
upcoming vote provided that the announcement is not a
"solicitation" for a proxy.4

However, corporate statutes and securities legislation in Canada
prohibit the solicitation of proxies unless the sender (board or
activist) provides shareholders with an information circular
containing prescribed information.5 Therefore, the
communication should not request any shareholder action on a
proxy.

Whether or not a communication crosses the line into illegal
proxy solicitation is a fact-specific determination based on the
"principal purpose" of that communication and the
surrounding circumstances. For instance, in Smoothwater Capital
Partners LP v. Equity Financial Holdings Inc., 2014 ONSC 324,
the Court determined that a single press release by a board aimed
at informing shareholders and responding to the activists'
apparently inaccurate statements was not a proxy solicitation. The
Court cautioned that in the same circumstances, "a series of
press releases" could constitute a solicitation.

To solicit proxies online, an activist may use the
"broadcast exemption" under National Instrument
51-102.6 This exemption permits shareholders to solicit
proxies over the internet7 without sending an
information circular to shareholders subject to two
limitations.8

First, the broadcast must contain certain
information9 and that information, together with a copy
of any communication intended to be published, must be filed on
SEDAR.10 Second, the broadcast exemption is only
available to an activist nominating or proposing to nominate a
director if an information circular regarding the proposed
nominee(s) is filed on SEDAR and the communication refers to that
information circular and discloses that it is filed on
SEDAR.11

The information that NI 51-102 requires in the online
"broadcast", while less onerous than an information
circular, is lengthier than the transmission limits of certain
social media (e.g. Twitter's 140 character limit). The SEC has
addressed such limitations in staff guidance allowing disclosure
requirements to be satisfied through a hyperlink within the
communication.12 In Canada, it is currently unclear
whether a tweet directing shareholders to a website with the
information prescribed by NI 51-102 would breach securities law.
Depending on the circumstances, arguably, the policy goals of NI
51-102 would not be undermined by such a tweet. However, regulatory
guidance is required for market participants to confidently use
Twitter and other social media platforms to promote broadcasts
exempted under NI 51-102.

Even with the foregoing restrictions, social media enables
shareholders not affiliated with the board or the activist to
amplify a particular message either through new communications or
the retransmission of those previously made. Consider, for
instance:

a shareholder not acting jointly or
in concert (a factual determination13) with an activist
uses social media to support the activist's existing campaign
to replace the board

a shareholder re-tweets the
board's message soliciting proxies but drops the hyperlink to
the disclosure

In the first example, provided the shareholder is not illegally
soliciting proxies, the use of social media could provide the
activist with a strategic advantage over the board. In the second
example, the shareholder is arguably soliciting proxies on the
board's behalf but fails to retransmit the board's complete
message. Would this failure be attributed to the board in Canada?
The SEC has addressed this issue, at least in the context of a
securities offering, by noting that re-attribution will not take
place where the original communication (the board's disclosure
in our second example) was compliant and the subsequent
communication was made by a true third party (i.e. one not acting
jointly or in concert).14 The retransmission issue is
still an area of open debate in Canada.

Selective Disclosure (concern for board)

Generally speaking, social media should not be the exclusive
means of communicating with shareholders during a proxy contest.
Getting the message out through multiple channels is not a
difficult sell. As an added incentive, there are legal concerns
about the "selective disclosure" of material
information.

National Policy 51-201 requires that material information about
public companies be "generally disclosed". For
information to be generally disclosed, it must be disseminated in a
manner calculated to effectively reach the marketplace and
investors must receive a reasonable amount of time to analyze the
information. The opposite — "selective disclosure"
— occurs when a company discloses material non-public
information to a limited group of stakeholders (media, analysts,
institutional investors, other market professionals, or,
potentially for example, via a tweet to the subset of its
shareholders that use the social media platform) and not broadly to
the investing public. The regulatory concern is that selective
disclosure undermines confidence in the marketplace by potentially
creating unequal access to information and opportunities for
insider trading. By way of example, in Flag
Resources,15 the Alberta Securities Commission was
critical of the selective disclosure of information to certain
shareholders rather than the capital markets broadly. The
Commission reasoned that without information being generally
disclosed, uninformed investors may make ill-advised investment
decisions.

In our view, the risk of selective disclosure may be mitigated
by using social media to promote material information already
disseminated via traditional channels.

Misrepresentation Concerns (concern for board and
activist)

As with traditional media, a board and activist should carefully
consider the accuracy of the information shared on social media,
including during a proxy contest. Consider the following
scenarios:

An activist tweets that a material
contract signed by the company was secured through grafting.
What if the tweet was untrue?

An activist creates a slick YouTube
video alleging that the board had entered into material agreements
with parties related to the company's largest shareholder, in
breach of MI 61-101. What if the activist's allegations
were false?

The board, in response to heavy
criticism by an activist, tweets a "rosy picture" about
its financial position. What if the board overstated the
company's position?

There are at least three potential implications to such
misrepresentations.

First, the board (and perhaps activists) may be liable for
misrepresentations on social media that cause an investor to trade
in the company's securities. Therefore, care must be exercised
to ensure that the information on social media contains no untrue
statement of material information and does not omit to state
material information that is required to be stated or necessary in
order to make any other statement therein not misleading in the
light of the circumstances in which it was made.

Second, an activist may not be permitted to vote proxies at a
shareholder meeting if the activist's information circular
contained a material misrepresentation.16 Although
unprecedented, the same position may be taken to invalidate an
activist's proxies that were obtained while material
misrepresentations were being promoted by the activist or a joint
actor on social media.

Third, securities regulators may commence enforcement
proceedings against the sender.

Defamation (concern for board and activist)

Proxy contests can be 'no holds barred' brawls with both
sides trading sharp jabs. As parties become comfortable using
social media to promote their position and correspondingly, to
attack the other side's record, they should bear in mind that
social media, like traditional media, can form the basis of a
defamation lawsuit.17 For instance, in Fuda v.
Conn,18 an activist sued the company's
directors alleging that comments made in a management information
circular were defamatory and intended to undermine his reputation.
The Court found that the circular contained "false
innuendoes" that damaged the plaintiff's reputation.
Although the circular was published only once, the information
therein was "distributed broadly by being repeated on various
sites on the Internet."19

What's next?

Despite the regulatory vacuum, we expect social media to be
increasingly leveraged in Canadian proxy contests. As we noted,
social media can be used to communicate with shareholders subject
to certain legal issues. Before harnessing the power of social
media, a board or activist should carefully consider these legal
issues with the benefit of legal advice. Once unleashed, social
media can be a powerful medium to influence public discourse and
proxy contests.

[2] The Securities and Exchange Commission
("SEC") has recognized "the growing interest in
using technologies such as social media to communicate with
security holders and potential investors". To this end, the
SEC has issued guidance addressing areas of concern that arise in
using social media. See for example, Securities and Exchange
Commission, Division of Corporate Finance Compliance and Disclosure
Interpretations, Securities Act Rules, Question 110.01, 110.02,
164.02, 232.15 and 232.16, http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm

[3] A board may make announcements on social media
subject to the consideration of the issues discussed in this post
under the heading "Selective Disclosure".

[4] See NI 51-102 – Continuous Disclosure
Obligations, where "solicit" also does not include
"publicly announcing, by a securityholder, how the
securityholder intends to vote and the reasons for that decision,
if that public announcement is made by ...(ii) a broadcast medium
or by ... electronic or other communication
facility".

[5] In limited circumstances, the sender may rely on an
exemption from the requirement to prepare and file a proxy
circular.

[7] The exemption only applies if the proxy solicitation
is "made to the public"; i.e., if it is
"disseminated in a manner calculated to effectively reach the
marketplace". This would generally include an "electronic
or other communication facility generally available to the public,
or appearing in a...website or other publication generally
available to the public."

[8] In addition to these two limitations, soliciting
proxies by broadcast must also be permitted under the corporate
statute under which the issuer is incorporated or organized (it is
permitted under the CBCA in s. 150(1.2) and the Business
Corporations Act (Ontario) in s. 112(1.2)).

[9] NI 51-102 s 9.2(4)(d) requires the activist to
specify in the broadcast:

i. the name and address of the reporting issuer to which
the solicitation relates,

ii. certain information about (a) the revocability of
proxies, (b) the identity of the person making the solicitation,
(c) the solicitation arrangements and costs and who will bear such
costs, and (d) any material interest of the person making the
solicitation, or any of their associates or affiliates, in any
matter to be acted upon at the meeting, other than the election of
directors and the appointment of an auditor, and

iii. any information required to be disclosed in respect
of the broadcast, speech or publication by the laws under which the
reporting issuer is incorporated, organized or
continued.

[10] NI 51-102 s 9.2(4)(c).

[11] NI 51-102 s 9.2(6), CBCA s. 150(1.2)

[12] Securities and Exchange Commission, Division of
Corporate Finance Compliance and Disclosure Interpretations,
Securities Act Rules, Question 110.01 and 164.02. The SEC has
issued guidance allowing issuers to use social media to communicate
with security holders and potential investors, subject to certain
conditions such as i) communication through technology that is
character limited; ii) the character limitations prevent full
disclosure; and iii) the communication has an active hyperlink to
the required information.

[13] It is a question of fact whether otherwise unrelated
parties are acting jointly or in concert. The joint acting need not
be by way of a formal or written agreement. Circumstantial
evidence, such as family relationships, communication between the
parties and attendance at meetings together, can be taken into
account in determining whether the parties were making a concerted
effort to bring about a specified objective. See Genesis Land
Development Corp. v Smoothwater Capital Corporation, 2013 ABQB
509 at paras. 24-5.

[14] Securities and Exchange Commission, Division of
Corporate Finance Compliance and Disclosure Interpretations,
Securities Act Rules, Question 110.02. We note that the SEC has not
specifically commented on the attribution of a retransmitted
communication in the context of a proxy contest despite having done
so in the context of a securities offering. The reasoning for this
lack of guidance is unclear and further clarification from the SEC
would be a welcome development.

[15] Flag Resources (1985) Limited, Re, 2010
ABASC 143.

[16] For instance, in Hastman v. St. Elias Mines
Ltd., 2013 BCSC 1069, the meeting's Chair rejected the
dissidents' proxies representing over 90% of the vote because
of uncured misrepresentations in their Circular. The Court upheld
the Chair's decision.

[17] In Canada, the plaintiff bears the onus of proving
three things:

1. that the impugned words were defamatory, in the sense
that they would tend to lower the plaintiff's reputation in the
eyes of a reasonable person;

2. that the words in fact referred to the plaintiff;
and

3. that the words were published, meaning that they were
communicated to at least one person other than the
plaintiff.

If these elements are established on a balance of
probabilities, falsity and damage are presumed. After those
elements are established, the onus shifts to the defendant to raise
a valid defense. See Grant v Torstar Corp., 2009 SCC 61,
[2009] 3 SCR 640 at para 28.

As a construction company that actively bids and works on larger infrastructure projects, you will likely be required to provide a signed certification in response to future Requests for Qualifications.

On November 14, 2016, the Securities and Exchange Commission ("SEC") announced an award of more than $20 million to a whistleblower who promptly provided the regulator with valuable information that allowed the SEC to commence an enforcement action against the wrongdoers before they could squander the money.

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